What Small Business Owners Should Know About Taxes

As a small business owner, understanding the tax landscape is crucial for maintaining financial health and compliance with legal requirements. Taxes can be complex, but knowing the basics can help you navigate the system effectively. Here's a comprehensive guide to help small business owners grasp the essential aspects of taxes.

Types of Taxes for Small Businesses

Small businesses face various types of taxes depending on their structure and operations. The main categories include:

Income Tax: This is a percentage of your business's income paid to the government. Rates vary based on your business entity and location.
Payroll Tax: If you have employees, you must pay Social Security, Medicare, and federal unemployment taxes.
Self-Employment Tax: Applies to self-employed individuals, covering Social Security and Medicare.
Excise Tax: Applies to specific industries like manufacturing or air transportation.
Property Tax: For businesses owning property like buildings or land.
Sales Tax: Applies to businesses selling goods or services subject to sales tax.

Business Structures and Tax Implications

The structure of your business significantly affects your tax obligations:

Business Structure	Tax Implications
C Corporation	Flat federal rate of 21%. Double taxation applies as both the corporation and shareholders are taxed.
S Corporation	Pass-through entity; income is taxed at the individual level.
Sole Proprietorship	Pass-through entity; income is taxed at the individual level.
Partnership	Pass-through entity; income is taxed at the individual level.
LLC (not treated as C Corp)	Typically a pass-through entity; income is taxed at the individual level.

Tax Rates for Small Businesses

Federal Income Tax Rates for C Corporations

C corporations pay a flat federal income tax rate of 21% on their net taxable income

Pass-Through Entities

For pass-through entities like sole proprietorships, S corporations, and partnerships, income is taxed at the individual level. The tax brackets for individuals in the U.S. for 2025 range from 10% to 37%

Example of Individual Tax Brackets

Taxable Income	Tax Rate
$0 - $11,925	10%
$11,926 - $48,475	12%
$48,476 - $103,350	22%
$103,351 - $197,300	24%
$197,301 - $250,525	32%
$250,526 - $626,350	35%
Over $626,350	37%

State and Local Taxes

Most states charge state income tax on corporate income, and rates vary significantly by location. For pass-through entities, state income tax rates apply to the individual's income

Tax Filing Steps for Small Businesses

Collect Company Records: Gather all financial documents, including income statements and expense reports.
Understand Sales Tax Requirements: Determine if your business is subject to sales tax.
Find the Correct Tax Form: Use IRS forms relevant to your business structure (e.g., Form 1040 for sole proprietors).
Calculate Taxes: Estimate quarterly taxes and file annually.
Consult a Tax Professional: Ensure compliance and maximize deductions.
File Taxes: Submit your tax return by the deadline to avoid penalties.

Tax Deductions and Credits

Small businesses can benefit from various tax deductions and credits to reduce their tax liability. Common deductions include business expenses like equipment, travel, and advertising costs. Credits might include research and development credits or employment credits

Conclusion

Navigating small business taxes requires understanding your business structure, applicable tax rates, and available deductions. By staying informed and seeking professional advice when needed, you can ensure compliance and optimize your tax strategy to support business growth.

What Small Business Owners Should Know About Taxes